Question

While preparing the financial statements of Amazing Consulting Company (ACC) for the year ended December 31, 2018, you discover the following:

1. An insurance policy covering four years was purchased on April 1, 2018, for 6,240. The entire amount was debited to insurance expense and no adjusting entry was recorded for this item.
2. During November 2018, the company received a $4,100 cash advance from a customer for services to be rendered in 2019. The $4,100 advance was credited to sales revenue.
3. There were no supplies listed in the balance sheet under assets (assume company debits supplies expense whenever it purchases supplies). However, you discover that supplies costing $700 were on hand at December 31.
4. ACC borrowed $18,000 from XYZ Company on September 30, 2018. Principal and interest at 8% will be paid on September 30, 2019. No accrual was recorded for the interest.
5. Net income reported in the 2018 income statement is $75,000 before reflecting adjusting entries related to any of the above items.

Required

1. Prepare the adjusting entries (if any) related to parts a to d. Please use a single journal entry to get to the correct amount (don’t use correcting entries). (6 points)
2. Determine the proper amount of net income for 2018. (3 points)

Answer 1

a.	Jounral Entries
Date	Account Titles and Explanation	Debit ($)	Credit ($)
31/03/2018	Prepaid Insurance Expense                                        Dr	5070
	To Insurance Expense		5070
	(Insurance expense being paid for next year debited to prepaid insurance account. Amount caluclted as $ 6240/48 months *39 months)
31/03/2018	Sales Revenue                                                                     Dr	4100
	To Advance from customers		4100
	( Advance from customer wrongly credited to sales revenue )
31/03/2018	Closing Stock                                                                          Dr	700
	To supplies expense		700
	(Supplies debited to account but not used)
31/03/2018	Interest Expense                                                                    Dr	360
	To Accured Interest Payable		360
	(Being Interest charged for 3 months . Calculated as $ 18000*8%*(3Month/12 months))
b.	Effects on net income
	Particulars	Amount ($)
	Net Income reported in income statement	75000
	Adjustments for closing entries
	Add: Prepaid Insurance	5070
	Increase in closing stock	700
	Less: Sales Revenue	4100
	Interest Expense	360
	Proper net income
		76310
Explanation:
1	Decrease in insurance expense will increase the income.
2	Sales revenue will decrease because advance is asset and hence net income will decrease.
3	Supplies Expense will decrease . Hence, income will increase.
4	Intereast expense will increase . So, income will decrease